Default clauses in debt contracts

Ningzhong Li (), Yun Lou () and Florin P. Vasvari ()
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Ningzhong Li: University of Texas at Dallas
Yun Lou: HEC Paris
Florin P. Vasvari: London Business School

Review of Accounting Studies, 2015, vol. 20, issue 4, No 11, 1596-1637

Abstract: Abstract We examine the determinants of events of default clauses in syndicated loan and bond contracts, provisions that allow lenders to request the repayment of principal and to terminate lending commitments. We document significant variation in the use of default clauses and their restrictiveness within the same type of lending contract but also across loans and bonds. We find that default clauses in public bond contracts are less restrictive than those in syndicated loan contracts. We also document that two ex ante proxies for bankruptcy costs, the level of intangible assets and capitalized research and development expenditures at the time of debt contracting, are associated with less restrictive default clauses, especially in bond contracts. We conclude that bondholders attempt to mitigate the occurrence of inefficient defaults. Given their inability to coordinate with each other and their ownership of subordinated claims, bondholders incur higher default costs than bank lenders.

Keywords: Events of default; Default clauses; Loan contracts; Bond contracts; Cross-default (search for similar items in EconPapers)
JEL-codes: G21 G33 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-015-9337-8

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